MODULE -1

INDIAN COMPANIES ACT 2013

Module No. 1: Indian Companies Act 2013 [12

Hrs]
Introduction to Company Law, Evolution, Nature of Joint Stock Company, Overview
of Companies Act 2013 – Objectives, Significance of Companies Act 2013. Body
Corporate -Meaning, Features, Classification of Companies, Distinction between
Private Company and Public Company, Doctrine of Lifting the veil of corporate entity
CSR- Meaning, Scope, Provisions for CSR Activities under Schedule VII of the
Companies Act 2013

Introduction:
Company law deals with the structure, management, administration, and conduct of
affairs of companies. A company is given legal entity status by incorporating under the
company law. To improve the status, rights, duties & obligations of companies, the law
needs to be amended regularly.
The Companies Act, 2013 as well as 2017 the amendment to it and the ordinance that was
promulgated on November 2 nd, 2018 had some significant changes to the corporate legal
framework of India.
The need for regulating and providing safety guidelines for the functioning of a company
made the legislators enact the Companies Act, 1956. The said Act helps in regulating the
basic aspects of company law, from its incorporation to its dissolution. An Act or a law
provides a proper legal framework for the said functions. The companies Act, 2013
provides for all these.

Evolution of Company Law in India

❖ In 1850, Company Law was introduced with the Companies Act of 1850 by Joint
Stock Company Act of 1844.
❖ Company Law was amended many times between 1852 to 1883 because there was
a lot of conflict on its implementation in India.
❖ Main reason behind this conflict was the difference among the views of different
people residing here and their worst thinking about English Laws.

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 ❖ At that point of time India was not advance people and their way of living was not
as good as that of English people.
❖ This Joint Stock Companies Act of 1844 for the first time provide that an
organization might be incorporated by registering without obtaining a charter or
sanction of the registrar of this act was created by this act but the power of financial
obligation was denied for the registrar in this act.
❖ later in 1955, the British Parliament with the majority passed the indebtedness act
which provide some liabilities over the members of the company who were
registered and by this the earlier act of 1844 get suspended when this new act of
1856 come into existence.
❖ This act helped a lot of companies to develop their economic base.
❖ Many companies were established at that era and a lot of economic development
took place which makes England economically strong.
❖ A smart mode of making companies memorandum has been introduced by this
act which joined a lot of companies all together.

Meaning & Definition of Company

Company is a corporate body and a legal person having status and personality distinct
and separate from the members constituting it.
In the legal sense, a company is an association of both natural and artificial persons and
is incorporated under the existing law of a country.
Section 2(20) of the companies Act, 2013 defines a company as “a company incorporated
under this Act or under any previous company law”. Hence, the law recognizes only
those companies that have been authorized to function under the 2013 act or its
predecessors.

Nature and Characteristics of Joint stock Companies

1. CORPORATE PERSONALITY:
A company incorporated under the Act is vested with a corporate personality so it
bears its own name, acts under name, has a seal of its own and its assets are separate
and distinct from those of its members. It is a different ‘person’ from the members
who compose it. Therefore, it is capable of: owning property, incurring debts,
borrowing money, having a bank account, employing people, entering into contracts
and suing or being sued in the same manner as an individual.

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2. COMPANY AS AN ARTIFICIAL PERSON:
A Company is an artificial person created by law. It is not a human being but it acts
through human beings. It is considered as a legal person who can enter into contracts,
possess properties in its own name, sue and can be sued by others.
3. COMPANY IS NOT A CITIZEN:
The Company, though a legal person, is not a citizen under the Citizenship Act, 1955
or the Constitution of India.
4. COMPANY HAS NATIONALITY AND RESIDENCE:
Though it is established through judicial decisions that a company cannot be a citizen,
yet it has nationality, domicile and residence.
5. LIMITED LIABILITY:
The company, being a separate person, is the owner of its assets and bound by its
liabilities. The liability of a member as shareholder extends to the contribution to the
capital of the company up to the nominal value of the shares held and not paid by
him.
6. PERPETUAL SUCCESSION:
An incorporated company never dies, except when it is wound up as per law. A
company, being a separate legal person is unaffected by death or departure of any
member and it remains the same entity, despite total change in the membership.
Perpetual succession, means that the membership of a company may keep changing
from time to time, but that shall not affect its continuity.
7. SEPARATE PROPERTY:
A company being a legal person and entirely distinct from its members, is capable of
owning, enjoying and disposing of property in its own name. The company is the real
person in which all its property is vested, and by which it is controlled, managed and
disposed off.
8. TRANSFERABILITY OF SHARES:
The capital of a company is divided into parts, called shares. The shares are said to be
movable property and, subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to a company. Section 44 of the
Companies Act, 2013 enunciates the principle by providing that the shares held by the
members are movable property and can be transferred from one person to another in
the manner provided by the articles.
9. CAPACITY TO SUE AND BE SUED:

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 A company being a body corporate can sue and be sued in its own name.
10. CONTRACTUAL RIGHTS:
A company, being a legal entity different from its members, can enter into contracts
for the conduct of the business in its own name.
11. LIMITATION OF ACTION:
A company cannot go beyond the power stated in its Memorandum of Association.
The Memorandum of Association of the company regulates the powers and fixes the
objects of the company and provides the edifice upon which the entire structure of
the company rests.
12. SEPARATE MANAGEMENT:
The members may derive profits without being burdened with the management of
the company. They do not have effective and intimate control over its working and
they elect their representatives as Directors on the Board of Directors of the company
to conduct corporate functions through managerial personnel employed by them. In
other words, the company is administered and managed by its managerial personnel.
13. VOLUNTARY ASSOCIATION FOR PROFIT:
A company is a voluntary association for profit. It is formed for the accomplishment
of some stated goals and whatsoever profit is gained is divided among its
shareholders or saved for the future expansion of the company.
14. TERMINATION OF EXISTENCE:
A company, being an artificial juridical person, does not die a natural death. It is
created by law, carries on its affairs according to law throughout its life and ultimately
is effaced by law. Generally, the existence of a company is terminated by means of
winding up.

Overview of Companies Act 2013

❖ The Companies Act 2013 is an Act of the Parliament of India on Indian company
law which regulates incorporation of a company, responsibilities of a company,
directors, dissolution of a company.
❖ The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections
in the Companies Act, 1956 and has 7 schedules. However, currently there are only
484 (470-43+57) sections in this Act.
❖ The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving
the assent of the President of India on 29 August 2013.

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❖ The section 1 of the companies Act 2013 came into force on 30 August 2013. 98
different sections of the companies Act came into force on 12 September 2013 with
few changes like earlier private companies’ maximum number of members were 50
and now it will be 200.
❖ A new term of "one-person company" is included in this act that will be a private
company and with only 98 sections of the Act notified.
❖ A total of another 183 sections came into force from 1 April 2014.
❖ The Ministry of Corporate Affairs thereafter published a notification for exempting
private companies from the ambit of various sections under the Companies Act.
❖ The 2013 legislation has stipulations for increased responsibilities of corporate
executives in the IT sector, increasing India's safeguards against organized cyber
crime by allowing CEO's and CTO's to be prosecuted in cases of IT failure.
❖ Minister of Corporate Affairs, and introduced The Companies (Amendment) Bill,
2020. It was passed by the parliament in 2020.

Body Corporate
A body corporate is a legal entity created when land is subdivided to create common
property and lots, and is registered to establish a community titles scheme. The scheme
can be a duplex, a residential unit block, a high rise accommodation complex, a shopping
complex, or a residential suburb, or a business park. Every owner of a lot in a community
titles scheme is automatically a member of the body corporate.

Features of Body Corporate

1) Financing of Body Corporate Financed
Contributions (otherwise known as levies) are received from every lot owner of the
body corporate and are pooled to maintain the community and common areas. The
size and frequency of the contributions required to properly run the body corporate
are decided by all owners at the annual general meeting.
There are two types of contributions set by the body corporate:
➢ The contributions to the administration fund.
➢ The contributions to the sinking fund.
2) Body Corporate Make Decisions
Decisions are made by owners in two ways:
➢ At a meeting of all the owners (a general meeting)

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 ➢ At a meeting of the committee for the body corporate
3) Common property
Most bodies corporate have “common property”. This usually includes the driveway,
facilities such as a laundry, gym or pool and also the open space on the property. This
common property must be managed and have liability insurance so that it serves only
the purposes intended and doesn’t expose the body corporate to unnecessary legal
risks.
4) Operate of body corporate operate
Bodies Corporate managed by Ace Body Corporate Management have an individual
bank account for each body corporate. The manager is normally the sole signatory to
that account under delegation from the members of the body corporate. An annual
general meeting is held at the beginning of each financial year of the body corporate.
This meeting sets the budget and addresses any concerns of the members. This sets
the “contributions” which the members have to pay each year.
5) Ensures body corporate legislative matters are being adhered to
Resolves disputes and provides an objective approach to dealing with members’
concerns or disputes. While disputes are rare, some situations can cause conflict;
including tenanted units, parking, noise, adjacent developments etc. An objective,
professional body corporate manager can assist in these situations.
6) Bodies corporate perform only a limited purpose.
➢ Administer the common property and the body corporate assets for the benefit of
the owners of lots included in the scheme
➢ Maintain common property to the extent it is in structurally sound condition
➢ Enforce the community management statement (including by-laws affecting the
common property)
Carry out other functions given to the body corporate under legislation, such as
keeping records about its operations, meetings and owners.

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Classification of Companies:

1. On the Basis of Incorporation

On the basis of incorporation, companies are classified into:
A. Chartered Company
If a company is incorporated under a special charter granted by the monarch, it is
called a Chartered Company and is regulated by that Charter.
B. Registered Companies
These companies come into existence only when they receive a Certificate of
Incorporation from the Registrar of Companies (RoC), thereby, registering
themselves under the Companies Act, 2013.
C. Statutory Companies
Such companies are formed by a special act passed by the Parliament or
central/state legislation. They are independent and exercise control over a
specified area or any commercial activity.
2. On the Basis of Liability
Companies can also be classified into three categories on the basis of liability of its
members.
A. Companies Limited by Guarantee
A company limited by guarantee refers to a company having the liability of its
members limited by the memorandum to an amount the members may
respectively undertake to contribute to the assets of the company in the event of
it being wound up.
B. Companies Limited by Shares
A company limited by shares means a company having the liability of its
members limited by the memorandum to such amount, if any, unpaid on the
shares respectively held by them. The company can enforce this liability either
during the lifetime of the company or at the time of winding up.
C. Unlimited Liability Companies
Unlimited Company is a kind of a company which doesn’t have any limit on the
liability of its members. The liability of the members will not cease until the final
payment. Such a company may or may not have a share capital of its own.
3. On the Basis of Transfer of Shares
Companies can be classified into two types on the basis of the number of members.

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 A. Private Companies
The Companies Act, 2013 define a ‘private company’ means a company having a
minimum paid-up share capital of one lakh rupees or such higher paid-up share
capital as may be prescribed, and which by its articles, —
• Restricts the right to transfer its shares;
• Except in case of One Person Company, limits the number of its members to
two hundred: Provided that where two or more persons hold one or more
shares in a company jointly, they shall, for the purposes of this clause, be
treated as a single member:
• Prohibits any imitation to the public to subscribe for any securities of the
company;
B. Public Companies
The Companies Act, a ‘public company’ means a company which is not a private
company. “Public company” means a company which:
• Is not a private company;
• Has a minimum paid-up share capital of five lakh rupees or such higher
paid-up capital.
C. Limited Liability Partnership
➢ Such companies are governed by the provisions mentioned in the Limited
Liability Partnership Act 2008.
➢ This form of business enjoys the benefits of limited liability along with the
flexibility of management for the partners as in the case of a partnership
firm.
➢ Limited Liability Partnership is beneficial for small or medium businesses
due to its easy compliance formalities.
D. One Person Company
Section 2 (62) of the Companies Act, 2013 says “One person company means a
company which has only one person as a member”. It has the benefits of a
proprietorship and a company. The owner can run the company solely by
fulfilling all the legal requirements and limiting the liability as well.
As per the Act,
a. The person forming an OPC has to nominate a person with his/her written
consent of agreeing to it.

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 b. The name of the company must have one person company mentioned in
brackets.
c. It must have a maximum of 15 directors, however; a special resolution can
be passed to increase this number.
d. The individual member will be considered as the first director of the
company unless he/she appoints any director(s).
e. For all legal formalities, it is treated as a private company.
4. On the Basis of Control
Companies can also be categorized into two types based on control –
A. Holding Companies
The relationship of holding or subsidiary companies is established either with the
control of Board of Directors or control of share capital. A company will be a
holding company of another in the following scenarios:
➢ Controls the composition of the Board of Directors of the other company.
➢ Exercises or controls more than 50% of the total share capital either on its
own or together with one or more of its subsidiary companies.
B. Subsidiary Companies
Such companies are owned by another company either partially or wholly. They
are also known as sister companies.
Section 2 (88) (i) of the Act says: A company in which the holding company
controls the formation of the Board of Directors is called subsidiary.
C. Associate Companies
These companies are influenced by other companies which are not subsidiary
companies, and, instead involve a joint venture company. It has control over the
total share capital of at least 20% or right to make business decisions under an
agreement.
D. Foreign Companies
Companies which are incorporated outside India but, have an established
business in India are known as Foreign Companies.
As per the Companies Act,
➢ The company must have a place of operation in India, either by itself or by an
agent.
➢ Manage any business activity in India in any other manner.
5. On the basis of Holding of Shares:

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 Companies on the basis of Holding of Shares can be classified into:
A. Government Company: A Government company is a kind of a company in which
not less than 51% of the paid-up share capital is held by the Central or State
Government, or partly by the Central and State Governments, and includes any
company which is a subsidiary of a government company.
B. Foreign Company: A foreign company is any company or body corporate
incorporated outside India which has a place of business in India, and conducts
any business activity in India.

Distinctions between Private and Public Companies

Basics Private Company Public Company

A private company is a A public company is a

Meaning company which is owned company which is owned and
and traded privately. traded publicly

Minimum members 2 7

Maximum members 200 Unlimited

Minimum Directors 2 3

Suffix Private Limited Limited

After receiving certificate of

After receiving certificate incorporation and certificate
Start of business
of incorporation. of commencement of
business.

Statutory Meeting Optional Compulsory

Issue of prospectus /
Statement in lieu of Not required Obligatory
prospectus

Public subscription Not allowed Allowed

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 2 members must present 5 members must present in
Quorum at AGM
in person. person.

Transfer of shares Restricted Free

Doctrine of Lifting the Corporate Veil

 lifting the corporate veil under the Companies Act, 2013 means ignoring that a
company is a separate legal entity and has a corporate personality. Lifting of corporate
veil as per Companies Act, 2013 ignores the separate identity of the company and
looks back at the true owners who are in control of the company.
 The Corporate Veil is a safeguard that protects the members from the company’s
action. if a company violates any law or incurs any liability, the members cannot be
held liable. Thus, shareholders get protection from the acts of the company.
 The doctrine of lifting the corporate veil means the owners or shareholders or
members are separated from the corporate personalities when the company is
misused.

Statutory Provisions in support of Lifting the Corporate Veil

1. Reduction of number of members below the statutory minimum:
If at any time the minimum number of members of a company falls below two, in
case of Private company or below seven, in case of Public company; then the
company can carry on the business for a period of six months while the number is
so reduced, every person who is a member of the company during the time that it
still continues to carry on the business, knowing the fact that the minimum
number of members is reduced and the grace period of six months is also finished,
then as the case may be, the company and its members will be held liable and can
sue an amount which they made during those six months or else the company may
be severally sued, therefore.
2. Failure to refund application fee:
The directors of the company shall be jointly and severally liable to repay the
money (application money) with an interest of six percent per annum from the
date of expiry of one hundred and thirtieth day if they fail to repay the application
money without interest within one hundred and twenty days when the company
fails to allot shares.
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 3. Misdescription of company’s name:
An officer of an organization (company) who signs any bill of trade, hundi,
promissory note, check wherein the name of the organization isn’t referenced in
the recommended way, such official can be held personally liable to the holder of
the bill of trade, hundi, etc. except if it is properly paid by the company.
4. Fraudulent trading:
Under section 339 of the Companies Act, 2013, If in the course of the winding-up
of a company, it appears that any business of the company has been carried on
with intent to defraud creditors of the company or any other persons or for any
fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or
the Company Liquidator or any creditor or contributory of the company, may, if
it thinks it proper so to do, declare that any person, who is or has been a director,
manager, or officer of the company or any persons who were knowingly parties
to the carrying on of the business in the manner aforesaid shall be personally
responsible, without any limitation of liability, for all or any of the debts or other
liabilities of the company as the Tribunal may direct. Every person who had the
knowledge of such fraud will be punishable with imprisonment for a term which
may extend to two years or with a fine which can extend up to fifty thousand or
with both.
5. For investigating company’s ownership:
Under section 216 of the Companies Act, 2013, the Central Government may
appoint Inspectors to investigate and report on the membership of the company
for the purpose of determining the true individuals who are financially interested
in the company and who control its policy. Thus, the Central Government may
ignore the corporate veil.

GROUNDS FOR LIFTING THE DOCTRINE OF THE CORPORATE VEIL

1. JUDICIAL PROVISIONS:
 Non-compliance of the requirement of incorporation - The purpose of Sec. 464 of
the Companies Act, 2013 is to withdraw the advantages of the company when the
incorporation is not maintained.
 Fraudulent conduct - If the act is done to defraud the creditors of the company
during winding up, the members who done such act are personally liable whoever
knowingly parties to such fraudulent activities.

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  Name not properly described - In any act or contract when the name of the
company is not fully or properly required under Sec.12 who have done such act or
contract is personally liable.

2. JUDICIAL INTERPRETATION:
 Determination of Character - This doctrine is invoked to determine the character
of the company, the court on its discretion examine the character of persons in
relation to control of the corporate affairs.
 Tax Evasion - It is the duty of every earning person to pay taxes. The company is
no way exempted from this liability. If the company unlawfully avoided the tax
duty, it is an offence.
 To Prevent Fraud or Improper Conduct - The company cannot commit fraud or
misconduct on its own as it needs human agency The court can uplift the doctrine
of corporate veil in cases of fraud, misrepresentation, diversion of funds.
 Government companies - A company may sometime be considered as a trustee
or agent of its members and the company lost its individuality in favour of its
principle.
 Sham Companies - The court may lift the corporate veil against the sham
companies. Sham companies are mere cloaks and their personalities can be
ignored to identify the true nature of the members.
 Ultra-Vires Acts - Any act done outside the scope of the Memorandum of
Understanding and Article of Association and companies Act, 2013 is said to be
ultra vires, the court shall invoke the doctrine.
 To Protect Public Policy - When the person is guilty of contravening the public
polity or public interest the court can lift the doctrine of the corporate veil

Corporate social Responsibility:

 Corporate Social Responsibility (CSR) is the idea that a company should play a
positive role in the community and consider the environmental and social impact
of business decisions.
 “Obligations to pursue to those policies, to make those decisions or to follow those
lines of action, which are desirable in terms of the objectives and values of our
society.” — Howard R. Bawen

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  “Social responsibility requires managers to consider whether their action is likely
to promote the public good, to advance the basic beliefs of our society, to
contribute to its stability, strength and harmony.” — Peter F. Drucker

Provision and Scope for CSR Activities under schedule VII of the companies Act 2013
As Per Section 135 of the Companies Act (“CSR provisions”), every company with net
worth of INR 500 crore, or turnover of INR 1000 crore or more or net profit of 5 crore or
more is mandated to spend 2% of average net profit of the preceding three (3) years on
corporate social responsibilities/CSR activities.
Since the time CSR provisions were first introduced, the list of CSR activities enumerated
under Schedule VII of the Companies Act have been amended by the government from
time to time.
Most of the items enumerated under Schedule VII since its inception has been framed
around activities pertaining to social welfare and charitable activities with key focus on
eradicating extreme hunger and poverty, promotion of education, gender equality and
empowering women, reducing child mortality, improving maternal health, ensuring
environmental sustainability and protection of national heritage amongst others.
For instance, the pre-amended item (ix) under Schedule VII of the Companies Act
pertained to contributions and funds that could be made to technology incubators located
within academic institutions.

Activities which may be included by companies in their Corporate Social

Responsibility Policies relating to:
 Eradicating hunger, poverty and malnutrition, promoting health care including
preventive health care and sanitation including contribution to the Swach Bharat
Kosh set-up by the Central Government for the promotion of sanitation and making
available safe drinking water.
 Promoting education, including special education and employment enhancing
vocation skills especially among children, women, elderly and the differently abled
and livelihood enhancement projects.
 Promoting gender equality, empowering women, setting up homes and hostels for
women and orphans; setting up old age homes, day care centres and such other
facilities for senior citizens and measures for reducing inequalities faced by socially
and economically backward groups.

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 Ensuring environmental sustainability, ecological balance, protection of flora and
fauna, animal welfare, agroforestry, conservation of natural resources and
maintaining quality of soil, air and water including contribution to the Clean Ganga
Fund set-up by the Central Government for rejuvenation of river Ganga.
 Protection of national heritage, art and culture including restoration of buildings and
sites of historical importance and works of art; setting up public libraries; promotion
and development of traditional art and handicrafts;
 Measures for the benefit of armed forces veterans, war widows and their dependents;
 Training to promote rural sports, nationally recognised sports, Paralympic sports and
Olympic sports
 Contribution to the Prime Minister’s national relief fund or any other fund set up by
the central govt. for socio economic development and relief and welfare of the
schedule caste, tribes, other backward classes, minorities and women;
 Contributions or funds provided to technology incubators located within academic
institutions which are approved by the central govt.
 Rural development projects
 Slum area development.

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